Granada and Compass close to £6bn deal

Creation of a hospitality giant will allow the media interests to go it alone as a demerged TV company
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The Independent Online

Granada Group, the media, hospitality and hotel business, could finalise a £6bn merger with Compass Group, the contract caterer, before the end of the week, according to sources.

In confirming the deal talks, the companies said the new group would be demerged within a year, separating the enlarged company's hospitality businesses from Granada Media. Analysts said the hospitality company would be capitalised at between £11bn and £12bn, with the media company valued at £5bn to £6bn.

In a joint statement yesterday confirming the talks, Granada and Compass took the unusual step of specifying that the deal was unlikely to result in a premium for Compass shareholders. "Any such merger will be on terms broadly reflecting recent average market capitalisations of the two groups," they said.

It is understood, however, that the price to be paid for Compass, which is likely to offer new Granada shares with a mix-and-match cash alternative, has already been agreed. "They've set the price, but until the deal is done and signed, they won't reveal the terms," said a source, who said the deal should be finalised this week.

The non-premium price structure of the merger has left a sour taste in the mouths of City players. "It's potentially a big negative for Compass shareholders," said Fraser Ramzan, an analyst with Lehman Brothers, who has rated Granada stock as "outperform". "Granada's property assets will dilute the value of Compass shares."

Those concerns made Compass the biggest loser in the FTSE 100 yesterday, with its share price plunging 131.5p, or 16 per cent, to 771p. Granada, which is seen benefiting from the deal, added 6.5p to 639.5p.

The demerged hospitality business would link Granada's hotel, motorway services and catering operations with the bigger catering operations of Compass. Granada Media comprises Granada Television, London Weekend Television, two other ITV franchises, programme making, a 50 per cent interest in ONdigital and a stake in Box Clever, the TV rental business jointly owned with Nomura.

About two-thirds of Granada's annual sales of £4.1bn last year came from hospitality interests, such as Le Meridien hotels and Little Chef roadside restaurants, with the remainder coming from advertising and the sale of TV programmes such as Coronation Street.

Compass sales, all from catering, totalled £4.8bn last year, but have been expanding far more rapidly that Granada's for several years.

Another sign that the deal is very close to completion was confirmation that Gerry Robinson, Granada chairman, will chair the combined group until the demerger, after which he will retire but remain as a consultant to the hospitality company and a non-executive director of the media company. Francis Mackay, executive chairman of Compass, will become chairman of the hospitality company, while Charles Allen, Granada's chief executive, will become chairman of the media arm.

Investors and competitors, who have been awaiting Mr Robinson's next deal, couldn't have been too surprised yesterday. At the company's annual results in November, Mr Robinson and Mr Allen openly expressed their desire to execute a transforming deal.

They also indicated that such a deal would be likely to significantly enhance the company's scale outside of Britain, while cautioning that an overseas media deal was unlikely due to ownership rules. The importance of expanding overseas seems to have been the overriding consideration in Granada steering clear of bids for brewers Bass or Whitbread, both of which were apparently examined by Lazard, the company's financial advisor.

On the catering side, Granada's Sutcliffe business and Compass would hold nearly 40 per cent of the British market. That could prompt the Competition Commission to block the deal, although sources said yesterday that disposals to secure approval are actively being planned. That would be a minor ripple in a deal that seems designed to position the hospitality group with the necessary scale to prosper in the fast growing international catering sector, where the new group would have a market share of just 2.5 per cent.

The rapid timetable for the no-premium deal has been determined by the need to free Mr Robinson to focus on the next round of deal making among the ITV companies. In January, Granada intervened in the proposed merger of United News & Media and Carlton Communications, declaring that both companies were potential bid targets for Granada.

The Carlton-United link, along with Granada's interest in its ITV rivals, is currently before the Competition Commission, which is due to report to Stephen Byers, Secretary of State for Trade and Industry, by mid-June, with a final decision due four weeks later.

Last week the Independent Television Commission boosted Granada's chances of making a successful bid for some of the ITV franchises held by Carlton or United. It is believed that the ITC would approve a link-up of any two of the three companies, but would insist on disposals to keep the advertising market share of a new group to about 30 per cent.